home prices continue to riseThe real estate market has been appreciating in most areas of the country over the last two years. Some people are concerned rents and home prices are reaching unattainable levels similar to the situation before the recent housing crisis. The big question is whether price increases can be sustained or if we are in for dropping prices and more distressed sales. Here is a great read on the cities in the US with the 12 biggest increases in prices.

To add to the concern with increasing house prices, many people are saying there is still shadow inventory coming on the market from banks. The theories state the banks have held on to foreclosures and or not foreclosed on delinquent borrowers due to government regulations and other factors. However, I am a REO listing broker, who has heard about shadow inventory for three years and it has yet to materialize. We have seen big increases in prices in my area (Colorado) and many other areas across the United States; can home prices continue to rise in 2014?

Prices have risen in Colorado

I am by no means an expert on the United States housing market, but I am an expert in my area. I have been a licensed Real Estate agent since 2001, I sell well over 100 homes a year, I buy fix and flips and long-term rental properties. Knowing values and my market is extremely important to my business and success. The median price my town and surrounding area is about $175,000 and the median price in the US is about $177,500. I think those prices are similar enough for my theories to hold weight in most of the country. There are going to be places where prices are much higher or lower where some of my ideas might not work, but I can’t research every market in the country.

The housing crisis helped to bring on this price increase

There are multiple reasons I believe the housing crisis helped cause the sharp rise in housing prices. The most obvious reason is that house prices decreased across the country for years. Over the history of the United States housing prices have always increased due to inflation, building costs and other factors. When housing prices stayed stable for 7 years it makes sense they are do for an increase. When housing prices drop for seven years, the prices are really due for an increase. Of course many areas had a sharp increase in values before the housing market crash, but many areas had modest increases like my area in Colorado.

The second reason the housing crisis has caused home prices to increase; building almost stopped in the United States for 7 years. There were so many foreclosures during the housing crisis and the market had an ample supply of inventory for all price ranges. There was no way for builders to compete with low-priced distressed inventory so they stopped building. The US population continues to rise and housing must be built to keep up with that demand. Since there was no building for years, we are left with a housing shortage, especially in the lower price ranges.

Cost to build new homes is affecting house prices

In my area we are seeing a huge increase in new home builds. We saw almost no building for years, but with the market stabilization and now an inventory shortage the builders have come back. I checked my MLS system a few months ago to see just how many builders were in the area. I counted 52 builders in our county alone with active listings in the MLS system! A few years ago there was one, maybe two builders who had homes listed in the MLS.

The new construction is definitely bringing in more inventory to the housing market, but what kind of inventory is it? I mentioned that our average price is $175,000, but the builders can barely build homes below $200,000 in our area. Most of the new construction is well above $200,000 and that is not going to cure the inventory shortage in the lower end of the market. If our median price is $175,000 then that means over half of the market is not being affected by the new construction. The lower end of the market must rely on resale’s to supply their housing market. With REO inventory continuing to decrease there is no place for the market to go, but up. Core Logic shows Reo inventory is down 33 percent from a year ago.

What changes could cause a decrease in housing prices?

First off my analysis does not apply to all markets. I know many areas of the country have housing prices 5 times higher than our prices and they have unique markets. I have no idea what those prices will do, but historically it seems those market go up and down with huge variances. However, I do think there are some factors that could influence most markets across the country and cause a price decrease.

Housing prices are tied into the US economy. If people have jobs and are making money they can afford to buy homes. If we were to see another recession or the unemployment rate to increase significantly, then I could see our housing market decline again. I don’t think we will see the drop in housing prices that we previously saw, because investors are chomping at the bit to get good deals right now. I don’t think the investors will let prices decline very far, because they could rent those homes and still make money. I am an investor myself and not too worried about a price decrease or rent decrease, because I make sure I have plenty of room in my investments for market corrections.

If there really is a large shadow inventory of distressed properties looming in the background. I believe there would have to be a couple of scenarios for that shadow inventory to significantly affect housing prices.

1.The shadow inventory would have to be huge; millions and millions of foreclosures. Right now there is so much demand for distressed properties that I believe a large amount of distressed inventory could be absorbed easily in most markets.

2.The shadow inventory would have to be released in a very short amount of time. Over the last three years we have seen foreclosures released very slowly by banks. They are not dumping inventory all at once and that has helped to revive the housing market. If a large amount of inventory was released in a few months it could affect housing prices, but I don’t think that will happen based on past bank actions.

What about the hedge funds and their buying spree?

Many people are concerned about the hedge funds and their rental property strategy. I wrote an article on it a few months ago on why I don’t think their actions will affect most of the housing market. I think the hedge funds have driven up prices in local markets, but overall they have purchased a tiny fraction of the US housing market. If they all decided to sell their inventory at once, they could bring down prices in a few US markets. I do not think they are all going to sell their homes at once, because it would not benefit them to destroy housing markets where they hold significant inventory.

Conclusion

I think prices will continue to rise in most areas of the country, at least in the lower end of the market. There is no way for builders to build cheap enough to meet low-end demand and there is simply not enough inventory for that market segment without price increases. I think we could see another housing crash, but it would take major economic changes in the US economy or banks completely changing strategies on how they dispose of REO inventory that they may or may not have.